Highland Valley Copper mine in British Columbia's interior on March 26, 2017.JONATHAN HAYWARD/The Canadian Press
A broad basket of commodity prices has been tumbling for months, fuelled by concerns about slower growth in the world’s two largest economies, though so far, the pain has been overshadowed by fears about the equity sector sell-off.
Should the commodity rout drag on, Canadians will have to pay attention, because the country’s resource-heavy stock market and economy will be at the centre of any fallout. Slumping commodity prices will also dampen the prospects for merger activity, which only recently came back to life.
After rising in the first half of the year, the price of copper has dropped 22 per cent from its 2024 high, while the price of Brent crude, the international benchmark, has dropped 15 per cent from its own peak this year. Both pullbacks are sharper than the Nasdaq Composite Index’s 13-per-cent drop.
And it isn’t just those commodities. The current sell-off spans a broad basket of resources, touching everything from wheat and corn to critical minerals such as nickel and lithium.
Some of this correction stems from a narrative change around the transition to electric vehicles. Metals such as copper and lithium are required for EV batteries, and the hype around an electric future implied the world was undersupplied with them. Lately, subdued EV demand has popped that bubble.
But even deeper than that are concerns about the Chinese and American economies. China has been struggling for years, starting with a multiyear lockdown during the COVID-19 pandemic that froze its economy, followed by a tepid rebound once it reopened.
Until recently, investors had been willing to look past China’s troubles because the U.S. economy kept humming, supported by annual deficits worth around US$2-trillion. In the span of a few weeks, that optimism has started fading, spurred by an uptick in unemployment and recent reports about a pullback in consumer spending.
So far, the S&P/TSX Composite Index has been spared much pain, partly because gold is one of the few commodities that still has strength. That’s boosted the share prices of companies such as Wesdome Gold Mines Ltd., Iamgold Corp. and New Gold Inc. The TSX’s materials sub-index, which is comprised of miners, is up about 15 per cent this year.
But lately, miners that produce other resources have been selling off, including First Quantum Minerals Ltd. FM-T, HudBay Minerals Inc. HBM-T and Lundin Mining Corp. LUN-T, all of which are down between 20 and 30 per cent over the last month. And more pain could come.
In the past few weeks investors have been weighing the impact of the so-called Sahm rule. It’s named after former Federal Reserve economist Claudia Sahm, who noted that the U.S. economy has historically never avoided a recession when the three-month moving average of the country’s jobless rate rises by more than five-tenths above its last 12-month low. That threshold was recently met.
Economists at National Bank of Canada calculated that, the last seven times the Sahm rule was triggered – excluding the COVID-19, because it was such an anomaly – the median price of oil fell by 13.6 per cent, and the median price of copper fell 4.3 per cent. (Gold, though, saw its median price rise 2.9 per cent.)
Falling commodity prices would likely hurt stock valuations, and that would change the calculus for resource-sector mergers, which have recently picked up.
In late July, BHP and Lundin Mining announced a $4.1-billion joint venture to acquire Canadian-listed Filo Corp. to develop a significant copper project, among other things. But copper is now back to trading slightly under US$4 a pound.
Despite all the projections about an undersupply of the metal in future, there’s more than enough of it right now, in large part because China is copper’s biggest buyer. Recent data from the London Metals Exchange show that inventories of the metal have been rising to their highest levels since 2021.
As for oil, the price of brent crude is trading around US$76 a barrel. While that’s higher than roughly US$60 a barrel right before the pandemic, it’s arguably quite low, given all of the geopolitical tension in the Middle East.
This week, the U.S. Energy Information Administration updated its price forecasts for the next two years and predicted weaker demand in China because of “slower economic activity as well as updated monthly statistics showing reduced diesel demand, crude oil imports, and crude oil refinery runs” in the country.
Of course, commodity prices are notoriously fickle and can swing either direction quite easily. And in the long-run, shortages of metals such as copper are still set to materialize. But narratives matter a lot, and right now, the story is looking rather negative.